Getting hit by fraudulent orders affects the bottom line of any business. I read an article a while back about one of the bigger travel agencies on the Internet that wasn't able to get out of the red simply because it got so many fraudulent orders. (Fraudulent orders result in credit card chargebacks.) Now, this company may think it is too big to monitor all its transactions, but if it's in the red because of this problem, it is time to make some changes.

Smaller merchants are even more vulnerable. A small business that sells big-ticket items can be wiped out with just one or a few fraudulent orders. As a small-business owner, it is imperative that you prevent fraudulent charges. I will highlight here some ways to protect your merchant account from fraud.

Reducing Chargebacks Really Saves You Money

In the event of a fraudulent order (in which the credit card holder disputes a charge), the bank that issued the credit card will initiate a chargeback against the merchant. This means the card-issuing bank pulls the funds from that sale from the merchant's bank account, with or without notifying the merchant. Because the customer's bank initiates the chargeback, the merchant and his or her merchant account provider (MAP) may know nothing of the chargeback until the amount has been deducted from the merchant's account.

There is more to a chargeback than meets the eye. Not only does a merchant lose the actual inventory and the purchase price; there are also fees charged for each and every chargeback. These fees add up, with each one ranging from $15 to $50 (U.S.) a pop. Consult your MAP if you do not know what fees you can be hit with.

That is not all. Merchants who receive an excessive number of chargebacks can lose their merchant account. Termination can occur without warning, and the merchant could end up on the MasterCard match file, aka the terminated merchant file, which is monitored by other MAPs. If your name is on this list, it means you will not be able to get another merchant account. Once listed, merchants stay on this list for five years.

The credit card associations have adopted new rules and regulations. Visa charges a fine for excessive international chargebacks, and MasterCard fines merchants with high-volume sales for excessive chargebacks. These fines can cost several thousand dollars.

Prevent Fraudulent Orders Before They Happen

• 1. Verify cardholders' addresses. The most important part of accepting a credit card is to do your best to verify that the cardholder is the one actually making a charge. On the Internet this can be done by using the address verification system (AVS). It's not 100% guaranteed, but it is the best method available for verifying that the person placing the order is the card holder. AVS will attempt to match a portion of the customer's credit card statement billing address against the billing address the customer gave during the order. If you get an address and ZIP code match, chances are the actual cardholder, or someone authorized to use the card, placed the order. If you get a match of either the address or the ZIP code, then it is your decision whether to accept the credit card. If you do not get any match, then you need to sit on the order, jump up and down on it, chew on it for a while, and try your best to get in touch with the customer. If you cannot reach the customer, then it is in your best interest to reject the order.

  The AVS system is limited to credit card transactions within the United States. There is no system in place as of yet for verifying international orders. As attorney Anthony L. Ogden says, "You accept international credit card orders at your own risk."

• 2. Never accept an order placed from a free e-mail address. I have been laughed at and scoffed at over this comment simply because there are so many honest people who use free e-mail. If you deny orders from these customers, it means losing orders, but I don't think you'll lose as much as you would if you accepted them. I know one merchant who does $45,000+ per month in online credit card orders who followed this rule. One day he decided to throw out the rule to increase sales, and he almost lost his merchant account due to excessive chargebacks.
• 3. Beware of large orders for which the customer requests overnight shipment. Make sure you know that the actual card holder is placing the order. It may be a large order, but thieves don't care about the price; they aren't going to pay anyway.
• 4. Collect the IP address of the fraudulent order. An IP address looks something like this: 209.204.217.26. It is a unique number assigned to each computer location on the Internet. If your form for receiving orders is not already collecting this information, you can modify the code of the form you're using to enable it to deliver this information to you along with each order. You'll have to check with your Web host (or whoever provides the code for your form) to find out how to accomplish this.

  Once you have collected the IP address, you can find the owner or the ISP the owner uses by doing an IP lookup.

So keep an eye on those transactions. Use some common sense and good judgment, and things will go well with your Internet biz and merchant account.

About the Author:
Todd Sumrall is the co-founder of Merchant Solutions, a merchant account, Web hosting, and shopping cart provider based in northwest Florida.

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